Historically, we have witnessed a lot about how tariffs on a rival country’s goods can trigger a retaliatory response to new trade mandates. As of late, it seems like tariff actions and threats being taken by the Trump Administration are being announced almost daily. We hear about commodities, such as steel, aluminum, pork, and soybean products, but what affect does the strained trading relationships have on currency exchanges?
For one, the US dollar has been trading much higher against multiple other currencies as tariff volleys have gone back and forth between US rivals and partners alike. I believe I can safely say that disputes with the latter countries is an unpleasant surprise for many. The US dollar (USD), Japanese yen (JPY), and the Swiss franc (CHF), are all considered haven currencies. Market volatility does not affect all countries the same, but when it occurs, investors tend to move from their home country currency to buying “safe haven” currencies. This allows them to avoid any sudden market drops, or unanticipated currency value increases for that matter. To me, it seems a bit of an irony that aggressive and expeditious challenges to long established trade agreements by the US would cause the USD to rise. Although, most policymakers would agree that a weak dollar is best for economic growth. The US economy has been growing for several years and, in fact, grew tremendously last year. Commerce Secretary Wilbur Ross has postulated “that auto imports have damaged the U.S. car industry.” CBS News Foreign auto manufacturers build millions of cars on US soil and employee thousands of autoworkers. On that note enters the uncertainty, and it’s forcing central banks around the world to plan and execute measures to lessen the impact.
There are a few strategic maneuvers central banks can take to control or adjust for trade instabilities. The People’s Bank of China (PBOC) is deviating from fiscal policy by fixing the dollar-to-yuan exchange rate low. “The People’s Bank of China (PBoC) has set the Yuan’s reference rate at 6.4706 for Thursday, versus yesterday’s fix of 6.4586.” FX Street The goal is to project stability into the currency markets amid ongoing trade rows with the US under Trump. The Yuan allowed to rise or fall as much as 2% against the USD. This monetary policy shift allows for the Chinese government to continue negotiations and slap new tariffs as it sees fit while protecting its economic forecast. This is a critical decision as the world’s two largest economies square off. The dollar is expected to continue to rise against the yuan into the foreseeable future or the calming of tariff disputes. CNBC
A little bit of a divergence has occurred between the USD and one other currency–the British Pound (GBP). The GBP-to-USD rose +0.1057% to $1.3244 from $1.3173 on Wednesday, June 20. This isn’t because of a lack of tariff wars between the US one of our key allies, it’s because the Bank of England Monetary Policy committee voted to not raise the key lending rate this week. MarketWatch
Capital analysts will undoubtedly continue to observe how markets and central banks respond to the new hardball tariff policies. It’s anyone’s guess who will ultimately gain the upper hand in so many trade disputes or if the Trump Administration truly has a comprehensive end goal that will work in the best interest of the US economy, our commodities markets, and strategic global alliances.